John Gittelsohn of Bloomberg reports that global markets have become so synchronized that money managers risk losing on every front, according to Hiromichi Mizuno, chief investment officer of the world’s largest pension fund:
I can sum up GPIF's poor performance over the last few years in one sentence: "There's too much beta -- and not good beta -- dragging down the overall performance and introducing too much volatility in the Fund."
I recently wrote a comment on whether too much beta is dragging down Japan and Norway and while I concluded "yes", it's important to note some major differences too.
Norway's giant sovereign wealth fund has more international equity exposure whereas Japan's giant pension fund invests too much in local Japanese stocks and bonds, dragging down overall returns.
Interestingly, Reuters reports that Norway's central bank recently recommended the country's giant wealth fund shift more investments to North America:
There are other reasons to shift more assets to the US including the 'safe haven trade' which has dominated markets of late:
What else? Norway's central bank stated the country's sovereign wealth fund should have greater autonomy to invest in unlisted equities, with up to one percent of the equity portfolio that could be dedicated to that type of investment:
These are public fund managers where it's becoming increasingly more difficult to beat passive investing (indexing) strategies, although that bubble will eventually burst:
As far as private markets, GPIF's CIO Hiromichi Mizuno is right to note everyone is trying to increase their exposure to dampen volatility from public markets but as CPPIB's CEO Mark Machin recently warned again, a lot of mature pension plans are taking on more liquidity risk than they can afford, putting a third or more of of their assets into illiquid asset classes.
And if a major crisis hits them hard, they will be forced to sell their "liquid assets" at distressed prices or worse still, sell their private holdings too at distressed levels (giving more opportunities for CPPIB and other large investors to buy private market assets a lot cheaper).
Below, Japan's $1.5 trillion Government Pension Investment Fund lost money in multiple positions in the last three months of 2018. Bloomberg's Sarah Ponczek reports on "Bloomberg Daybreak: Americas."
Earlier this year, Bloomberg's Divya Balji reported on how the world’s biggest pension fund posted a record loss after a global equity rout last quarter of 2018 pummeled Japanese stocks.
I'm quite certain that GPIF's first half performance was a lot better than the last quarter of last year given the rally in global bonds and stocks. Maybe not as good as Denmark's ATP which posted a record 27% gain in the first half of this year but much better than Q4 2018.
Still, Hiromichi Mizuno has a giant beta problem to contend with and he's right to point out that global markets have become a lot more synchronized as rates plunge to record lows, wreaking havoc on global pensions. I've been warning my readers to brace for a bumpy ride ahead.
On that last point, Janet Mui, global economist at Cazenove Capital, and Jordan Rochester, currency strategist at Nomura International, discuss bond markets, gold and the risk of a global recession. They speak on “Bloomberg Surveillance.” Interesting discussion on why to own negative-yielding bonds.
Lastly, watch a panel discussion at this year's Milken Institute on filling the global infrastructure gap featuring Hiromichi Mizuno and other esteemed panelists. Excellent discussion, take the time to watch it.
Global markets have become so synchronized that money managers risk losing on every front, according to Hiromichi Mizuno, chief investment officer of the world’s largest pension fund.Hiromichi Mizuno has a very tough job, he's steering the world's largest pension ship and it's not headed in the right direction.
Japan’s $1.5 trillion Government Pension Investment Fund lost money in equities, fixed-income and currency positions in the last three months of 2018, Mizuno pointed out on Tuesday in Sacramento, California.
“Conventional wisdom of portfolio diversification is when we lose money in equity we make a profit in fixed income,” Mizuno told the board of the California Public Employees’ Retirement System, the largest U.S. pension. “But we lost in every single asset classes and lost in the currency translation as well. It never happened in the past.”
The Japan system’s annualized returns were 3.03% from fiscal 2001 to 2018, compared with a more than 6% annual average for Calpers, which has an annual target of 7%. More than half of GPIF’s portfolio was in domestic stocks and bonds as of March 31. Many Japanese bonds carry negative yields, while the country’s stocks have been falling since a high in January 2018.
The benchmark Topix index of shares tumbled 18% in the last quarter of 2018, and is up 0.2% this year.
GPIF is seeking uncorrelated returns by pushing into private investments, which can make up as much as 5% of its portfolio. Mizuno said it’s becoming an increasingly crowded trade. Alternative investments accounted for 0.35% of GPIF’s total assets as of the end of June, up from 0.26% at the end of March, according to its latest performance report.
“Everybody is trying to increase the private assets, or like a private investment, because obviously it’s not all correlated to the public market,” he said.
I can sum up GPIF's poor performance over the last few years in one sentence: "There's too much beta -- and not good beta -- dragging down the overall performance and introducing too much volatility in the Fund."
I recently wrote a comment on whether too much beta is dragging down Japan and Norway and while I concluded "yes", it's important to note some major differences too.
Norway's giant sovereign wealth fund has more international equity exposure whereas Japan's giant pension fund invests too much in local Japanese stocks and bonds, dragging down overall returns.
Interestingly, Reuters reports that Norway's central bank recently recommended the country's giant wealth fund shift more investments to North America:
Norway’s $1 trillion sovereign wealth fund should shift billions in investments from European stock markets and instead invest more in the United States and other North American markets to seek higher returns, the fund’s manager recommended on Tuesday.It only makes sense for Norway’s sovereign wealth fund to shift more assets to North America, especially the US market where you have roughly 22% of the S&P 500 made up of technology shares which have helped US markets outperform all other markets over the last ten years.
The world’s largest sovereign wealth fund has historically given higher weighting to European stocks, focusing on countries that Norway does the most trade with, and a lower weighting to those of North America.
But the Norwegian central bank, which manages the Government Pension Fund Global, said this was no longer necessary, and it wanted the fund’s portfolio to better reflect the available pool of investments.
“We can all see that both return and the common measure of risk has been better in North America in the past years than it has been in the rest of the world,” Egil Matsen, the deputy central bank governor in charge of the fund, told Reuters.
He declined to say how much of the value of the fund could potentially shift further to North American equities.
“We are not specific on that, and that is a conscious decision,” he said, stressing that it would be up to the finance ministry, and parliament, to decide whether to take up the central bank’s advice.
If they do, it would mean potentially billions of euros, pounds and other European currencies of investments would shift from Europe to the United States and other North American markets.
As it stands, Norway’s rainy day fund, which invests the proceeds of the country’s oil and gas production, owns more European stocks and fewer U.S. shares than the size of those markets would dictate
But the fund eased the policy of directing investment to Norway’s most important trading partners in 2012, the last time it reviewed its regional weighting.
The fund has since reduced its exposure to European shares from 50% of the total equity holdings to about 34% by the end of 2018. Some 43.0% of the fund’s investments were in North America at the end of last year and 17% in Asia.
There are other reasons to shift more assets to the US including the 'safe haven trade' which has dominated markets of late:
"In a world dominated by tepid economic growth, mediocre returns & a mountain of negative-yielding debt, foreign investors see American assets as a haven: They bought nearly $64 billion of U.S. stocks and bonds in June, the largest sum since August 2018"https://t.co/T6bY1BZ2H0pic.twitter.com/sBvuJOaJmi— Trevor Noren (@trevornoren) August 29, 2019
What else? Norway's central bank stated the country's sovereign wealth fund should have greater autonomy to invest in unlisted equities, with up to one percent of the equity portfolio that could be dedicated to that type of investment:
“The Bank believes that a limit of 1 percent of the equity portfolio would be sufficient to address the intentions behind this type of investment,” the central bank said in a letter to the finance ministry published on its website on Wednesday.Go back to read my comment on how too much beta is dragging down Japan and Norway where I stated the following:
[...] both Mizuno and Slyngstad need to ramp up their allocations to private markets and to do this properly, they really need to think outside the box. Given their giant size, it won't be easy to scale up private markets, something they're both very aware of.More recently, GPIF revealed its new fee structure to get better alignment of interests from its external managers because while approximately 20% of the fund’s assets are actively managed by the asset managers, only a small number of funds achieved the target excess return rate from 2014 to 2016.
Why ramp up privates and why is the strategy so important? Because the volatility of these giant funds is quite frankly, unacceptable even if they invest over the long run, and they need to to reduce it by partnering up with the right partners, getting the most bang for their buck while reducing overall fees.
To be blunt, they are both late to the private markets game but if they have the right partners and strategy, that doesn't matter.
These are public fund managers where it's becoming increasingly more difficult to beat passive investing (indexing) strategies, although that bubble will eventually burst:
An investor who successfully bet against mortgage securities before the 2008 crisis sees another opportunity emerging from what he calls a "bubble" in passive investment. https://t.co/t5qqtHc0iQ— Lisa Abramowicz (@lisaabramowicz1) August 28, 2019
As far as private markets, GPIF's CIO Hiromichi Mizuno is right to note everyone is trying to increase their exposure to dampen volatility from public markets but as CPPIB's CEO Mark Machin recently warned again, a lot of mature pension plans are taking on more liquidity risk than they can afford, putting a third or more of of their assets into illiquid asset classes.
And if a major crisis hits them hard, they will be forced to sell their "liquid assets" at distressed prices or worse still, sell their private holdings too at distressed levels (giving more opportunities for CPPIB and other large investors to buy private market assets a lot cheaper).
Below, Japan's $1.5 trillion Government Pension Investment Fund lost money in multiple positions in the last three months of 2018. Bloomberg's Sarah Ponczek reports on "Bloomberg Daybreak: Americas."
Earlier this year, Bloomberg's Divya Balji reported on how the world’s biggest pension fund posted a record loss after a global equity rout last quarter of 2018 pummeled Japanese stocks.
I'm quite certain that GPIF's first half performance was a lot better than the last quarter of last year given the rally in global bonds and stocks. Maybe not as good as Denmark's ATP which posted a record 27% gain in the first half of this year but much better than Q4 2018.
Still, Hiromichi Mizuno has a giant beta problem to contend with and he's right to point out that global markets have become a lot more synchronized as rates plunge to record lows, wreaking havoc on global pensions. I've been warning my readers to brace for a bumpy ride ahead.
On that last point, Janet Mui, global economist at Cazenove Capital, and Jordan Rochester, currency strategist at Nomura International, discuss bond markets, gold and the risk of a global recession. They speak on “Bloomberg Surveillance.” Interesting discussion on why to own negative-yielding bonds.
Lastly, watch a panel discussion at this year's Milken Institute on filling the global infrastructure gap featuring Hiromichi Mizuno and other esteemed panelists. Excellent discussion, take the time to watch it.